RBI to Meet Banks to Examine Grey Areas in Overseas Investment Rules

 WEALTHY INDIANS, biz families, cos want ambiguities to be removed to diversify assets, strategise

Sugata.Gosh@timesgroup.com

Mumbai: The Reserve Bank of India (RBI) will meet banks to sort out the grey areas in overseas investment (OI) regulations which have stalled the plans of several wealthy Indians, business families, and startups from taking exposures to foreign securities, funds and companies. Can a resident individual subscribetoan ‘unregulated’ fund in Singapore? Can a local startup buy into a fintech firm abroad? Is a high-networth (HNI) individual barred from holdingfixed deposits inan offshore bank? Will an Indian company holdingaminority stake, but havingno ‘control’, in a foreign company have to walk the extra mile on compliance? For months many Indians, keen to diversify their assets and execute business strategies, have been looking for unequivocal answers to a slew of such questions. Besides, clearing the fog on such matters would help individuals and companies avoid any violation of the Foreign Exchange Management Act (FEMA). The central bank has asked leading authorised dealer banks, who handle the transfer of money for such offshore investments, to identify the issues. Officials of RBI's Overseas Investment Department are scheduled to meet bankers this week, two persons aware of the matter told ET. Bankers and practitioners believe it would mark a beginning in resolving some of the issues which have been hanging fire for over a year. Eversincenew regulations were announced by the RBI in mid-2022, ambiguities have cropped up with banks taking different stands based on interpretations of their respective compliance departments. Some of the remittance proposals have also been stalled by banks in the wake of a widely shared perception that there is discomfort among the authorities inallowinglarge outflows. “The OI Rules and Regulations lack clarity on quite a few issues— primarily due to there beingno FAQs issued by thefinance ministry or RBI todate. While some of these issues have received clarity through some of the AD banks or RBI officials, it would be bettertohaveanofficial circular or FAQs so that investors at large have full clarity;” said Rutvik Sanghvi, partner at the CA firm Rashmin Sanghvi & Associates. The key issues, according to Sanghvi, which “require clarification in black and whiteare understandingof the permitted number of subsidiaries in case of round-tripped structures; definition of ‘control’ and ‘realestate activity’; investment in overseas ‘unregulated’ mutual funds with regulated fund managers; arm’s length concept in pricing guidelines where transactions are between unrelated entities; investment in foreign startups where there is no law governing startups in the host country. There are other open issues specific to resident individuals related to investment in fixed deposits vis-a-vis prohibition on ‘unlisted debt’; application of FCRA to foreign securities received as a gift; setting up family offices either outside India or through IFSC; apart from issues on amendments made under LRS.” Besides, authorities are yet to clear the air over setting up a family office by setting up a family investment BHAVIN G fund in GIFT City Many HNISs are also unsure whether they can invest in funds in Singapore and the US where the manager of the fund is regulated but not the fund itself. Overseas direct investment, or ODI, is one where a resident person holds more than 10% stake or exercises control over the overseas investee entity even with less than 10% holding. While other investments are largely categorised as overseas portfolio investments (OPI), even a nominal investment inan unlisted company can qualify as ODI. ODIs (unlike OPIs) have additional compliance and reportingrequirements. The paperwork is even more important when there is an element of control which is defined as the right to appoint majority shareholders or havinga say on management and policy decisions. “However, banks are insisting on extra compliance when a resident plansto hold over10% buthasno control over the foreign company,” said another person. Individuals investabroad through RBI’s liberalised remittance scheme which allows $250,000 offshore investments in securities and immovable propertiesbutnot in unlisted debt. RBI is yet to clarify whetherFDsare categorised as ‘unlisted debt’. Besides, such investors are required to bring back idle funds within six months, and many of them are failing to meet the minimum balance needed to keep bank accountsactive.